6501.T FY2026 Q2 Earnings Call Transcript
Date: 2026-10-28
Source: Financial Modeling Prep

Operator: Ladies and gentlemen, thank you very much for taking time out of your busy schedules to join us today. At this moment, we will begin Hitachi, Ltd. web conference on Q2 FY 2026 earnings. This time on Zoom’s Japanese channel. By choosing from the language options, the English audio can also be selected. Depending on your device, the language option may appear in different sections, but in the case of PCs, the button is at the bottom of the screen. Please choose the audio of your choice. First, Kato will provide an overview of the earnings, to be followed by Anand’s presentation, who will explain Hitachi Digital, the new company we announced today. Anand is CEO of Digital Engineering & AI Solutions Business Unit. Please wait while the slides are being switched. Kato-san, the floor is yours.
Tomomi Kato: I will explain our consolidated results for the second quarter of fiscal year 2026 and the outlook for the current fiscal year. First of all, I would like to talk about the performance highlights. Turning to our results for the second quarter of fiscal year 2026, Q2, revenues rose substantially, up 15% year-on-year, driven by business growth as well as factors including foreign exchange effects. As in Q1, all four sectors, Energy, led by its power grids business, DSS, Connective Industries, CI, and Mobility posted higher revenues and higher profits. Both revenues and adjusted EBITA reached record highs for a second quarter. Quarterly net income and core free cash flow would each have exceeded the previous year’s level, excluding the impact of last year’s business restructuring, including the air conditioning business. Next, fiscal year 2026 outlook. Following the upward revision in Q1, we have again revised our key financial figures upward, including net income, reflecting Q2 results that exceeded our original plan. Order trends and progress in productivity improvement, we raised our revenue forecast by JPY 300 billion, mainly in DSS and CI, and adjusted EBITA by JPY 40 billion, mainly in Energy and CI. We have also revised the full free cash flow and ROIC upward. In the second half and beyond, we plan to continue making CapEx, including capital investment as well as corporate growth strategy investment, to accelerate AI utilization and to develop the HMAX solutions. We will also continue to monitor geopolitical risks as well as the impact of rising interest rate on customer demand. As in Q1, we achieved double-digit revenue growth in Q2 with broadly similar trends. So I will go through the first half highlights by segment. Starting with DSS. The IT business, both orders and revenues grew 10% in Q2. We incurred a one-time loss, a cost of JPY 9 billion. But profit increased for the first half, thanks to revenue growth and ongoing productivity improvement through AI utilization and other measures. Adjusted EBITA margin also improved year-on-year. For the full year, we revised revenues upward JPY 70 billion to reflect the Q2 results and order trends in domestic IT business. Adjusted EBITA, we have maintained our forecast year-on-year, having absorbed the loss costs. In Energy, power grid orders were strong again in Q2 following Q1, rising substantially in the first half. We continued solid growth in demand for power transmission equipment. Revenues rose 32%, including foreign exchange effects. Higher revenues combined with productivity gains and other factors also drove a substantial improvement in profit margin. For the full year, the revenue forecast is unchanged, but we revised adjusted EBITA upward by JPY 33 billion owing to productivity gains from process management, loss containment and other measures. Profit margin is expected to improve by 15%. In mobility, railway system orders were strong again in Q2 following Q1. Thanks to large signaling and control orders and foreign exchange effects rising 40% in the first half. Revenues rose 18%, supported by a solid Lumada business such as railway signaling system, as well as foreign exchange effects and the profit margin improved year-on-year. For the full year, we expect higher revenues and profit and will grow with growth in Lumada business such as railway signaling system and higher adjusted EBITA. In CI, orders rose again in Q2 following Q1, led by measurement and analysis systems, building systems and others, up 26% year-on-year in the first half. Within this measurement and analysis system, orders grew 66% with increases in semiconductor manufacturing equipment and metrology and inspection equipment against the backdrop of growing investment demand in semiconductor business. Revenues rose 11% year-on-year, and profit also increased, driven mainly by the growth in measurement and analysis systems, together with expansion of the service business in building system and foreign exchange effects. For the full year, we raised revenues upward by JPY 50 billion and adjusted EBITA by JPY 5 billion, reflecting the metrology and inspection equipment expansion and change in timing of home appliances. Here I will explain the half year results and full year outlook, excluding special factors. Excluding special factors such as foreign exchange, business restructuring, and one-time effects, Hitachi consolidated revenue has grown 10% in the first half, and we expect this momentum to continue with growth at a similar level for the full year. The adjusted EBITA margin also improved year-on-year in the first half and is expected to improve by 120 basis points for the full year. So we have revised upward from the previous forecast. Underpinning this is continued growth in orders backlog. As shown in the bottom right, the order backlog in each sector is growing steadily. I will now outline the features of each segment. For fiscal year 2026 in DSS second half, revenue growth is expected to exceed the first half of a full year growth of 8% in fiscal year 2026. This is 2 points higher than the previous forecast, reflecting growth in the domestic IT demand. The main drivers are similar to first half, AI transformation and modernization are likely to continue. The profit margin is also expected to improve year-on-year. In energy, we expect the second half growth at roughly the same rate as the first half for the full year, a growth of 21%, mainly through higher production capacity from planned capital investment and headcount growth in Power Grid, together with productivity improvement. We expect a higher full-year profit and a substantial improvement in profit margin. In mobility, we expect to maintain a solid growth for the full year and the first half. As in the first half, the profit margin is also expected to improve, thanks to better business mix across railway signaling system and vehicles, and to cost reductions. In CI second half, revenue growth is expected to exceed the first half with growth for the full year as well. The main growth drivers include semiconductor manufacturing equipment and measurement analysis system and the service business in building system. The other business, service business, is expected to improve. Here, I will explain the year-on-year comparison to the first half. Revenue has grown 17% year-on-year. Even excluding special factors such as foreign exchange effects, one-time effects, and impact of Middle East situation, we achieved 10% year-on-year growth from business expansion. All four sectors posted higher revenues. Excluding special factors, adjusted EBITA margin improved 110 basis points year-on-year to 12.8%. Now year-on-year comparison for the full year. Revenues are expected to grow 13% year-on-year. Even excluding special factors, we expect to achieve 11% year-on-year growth. We plan higher revenues in all four factors. The adjusted EBITA margin is focused at 13% or 13.6% excluding special factors. Next, the interim net income and cash flow. First half results, excluding the negative impact of approximately JPY 150 billion from last year's business restructuring, interim net income increased year-on-year. Core free cash flow also increased year-on-year, excluding the approximately JPY 60 billion impact of last year's business restructuring, including the effect of large advance payments raised by JPY 200 billion year-on-year. Now, full year outlook. Despite the impact of last year's business restructuring, net income is expected to rise by approximately JPY 120 billion year-on-year, driven by higher operating income. Excluding the effect of last year's large advance payments, core free cash flow is expected to increase by approximately JPY 90 billion, driven by higher adjusted EBITA and improved net working capital despite increased CapEx and impact of business restructuring. In terms of cash conversion ratio, 100% will be maintained.
Masashi Hatakeyama: Topics.
Tomomi Kato: Hereafter, I will introduce the topics. We continue to make steady progress transforming our portfolio, including the transfer of Hitachi Construction Machinery shares, proposed sale of the share of Astemo, an auto parts manufacturer, as well as setting up a joint venture for the ATM business where we are the minority shareholder. Further, we are planning to sell the share of our electric appliances business by the end of next fiscal year. With respect to capital allocation for shareholder return, in view of the upward revisions we made to our core FCF and rising interest rates, the interim dividend payment will be increased above our initial forecast. It will be raised by 36% year-on-year. Share buyback for the first half totaled JPY 290 billion, which is half of what we have planned for this fiscal year. Regarding our growth investments, as is shown in the chart on the right, as part of organic growth investments, we increased year-on-year CapEx, including those for the Power Grid business, as well as investments for corporate growth strategy, including those for promotion of AI use and development of HMAX solutions. On top of that, we executed an inorganic investment of JPY 90 billion. Our company continues to proceed with the growth strategy. Under our capital allocation policy that we set at the beginning, we will make the necessary growth investments going forward as well. Here on this slide, I will explain the progress of our growth strategy in DSS. First on Japan's IT service business. In the first half, AX modernization in financial and social infrastructure fields drove the growth. Revenue increased by 7% year-on-year. By sector, financial infrastructure centering around insurance grew 19%. Profit margin also went up when adjusted for one-off factors. On a full year basis as well, mainly in financial and social infrastructure fields, revenue is expected to rise 6% year-on-year, and profit margin also is projected to increase after adjusting for one-off factors. In the overseas IT business, total business of Hitachi Digital in the first half, when combined with revenue from synergies with other sectors, rose by 28% year-on-year. Revenue from synergies grew substantially year-on-year, primarily in energy and mobility. Furthermore, because the market environment surrounding the digital engineering business was severe, an order-taking strategy with a focus on profitability was implemented, resulting in revenue at the same level as the year before on a standalone basis. The highlights of Q2 performance in FY 2026 are, as I described at the beginning, we steadily executed our inorganic strategy as well. Next, on page 17, allow me to discuss our financial conditions. Total assets at the end of Q2 in FY 2026 came to approximately JPY 15 trillion, which was roughly the same level as the year before. Cash and deposits increased, but also did advances received at the same time. CCC Cash Conversion Cycle declined slightly, mainly due to a reduction in account receivables and an increase in advances received, resulting in improved funding efficiency. This shows the status of revenue in Q2 by region, including the impact of foreign exchange. Revenue grew in all regions, particularly in North America and Europe. In DSS, Japan's IT business and Europe's storage business were robust. Energy expanded in almost all the regions, in particular in North America. I would like to explain the orders received in Q2 by segment. Orders for DSS with increases in Japan's AI transformation and modernization businesses were up 14% in Q2. For energy, the power grid business grew 47% overall due to the contributions from multiple large-scale HVDC projects in Europe and data center project in the U.S., on top of robust demand for transmission facilities. Mobility was up by 69% in total, with large orders for projects involving railway vehicle and signaling and control systems in Europe. In CI, against the background of expanding investment demand in the semiconductor industry, measurement and analysis systems centering around semiconductor manufacturing equipment were up 77%, leading the growth in CI overall. Lastly, I will explain the Lumada business on page 28. Lumada, the pillar of our growth business. In the first half, Lumada accounted for 44% of Hitachi's consolidated revenue. As is shown on the right, in FY 2026, our plan is to raise its revenue by 25% and profit margin by 17%. Primary areas of growth for Lumada have been Japan's IT business in DSS, semiconductor manufacturing equipment in CI's measurement and analysis systems, and service business in building systems, amongst others. HMAX, which is the solution for Lumada's digital service business, exhibited a progress rate of 47% against the FY 2026 four-year forecast of JPY 510 billion. HMAX, mainly in CI railway and DSS, led the overall progress. This time, we made upward revisions to our four-year forecast for both Lumada and HMAX respectively. I have just explained our Q2 earnings in FY 2026. Looking back on the first half, we realized that we were able to make steady progress in growth, profitability, and funding efficiency. On the other hand, in order to achieve the goals of Inspire 2027, management challenges still remain. In addition, the external business environment is uncertain. We, therefore, will continue to strengthen risk management as we take our growth strategy forward. Now, I would like to turn it over to Anand Birje, who has been supervising our overseas IT business since August. He will be discussing our policy going forward and Hitachi Digital's new organization.
Anand Birje: Thank you, Kato-san, and good afternoon, everyone, and thanks for taking time to join us today. My name is Anand Birje. I am the CEO of Hitachi's digital business globally, and I am based in Santa Clara, California. It is my pleasure to be here today and share both our market perspectives and also our vision, strategy, and plans to execute the strategy for Hitachi Digital globally. First off, just wanted to share how we see the market going forward. Everyone has been talking about the convergence of AI and the amount of opportunity and risks AI has created over the last three years. As we look forward to the market, if you go to the next slide, we really believe that there is a convergence of three big factors that is driving change across the market. Cloud as a foundational transformation element to enable data and data foundations that are critical for enterprises to leverage the full value of AI. Then, of course, rethinking every business value chain across industry verticals that AI is making possible. So all these three hype cycles, and I am calling them hype cycles because we all know that every industry leverages these capabilities and these new technologies at different pace and at different maturities. So we are seeing these hype cycles converging over the next five years. So at Hitachi, we actually see enormous opportunities in this conversion zone, to basically both bring our capabilities, to bring our customer base and opportunities we have accessing the customer base, and deep domain expertise to help customers leverage all these three elements of transformations. If we go to the next slide. One of the things that I've talked about is how Hitachi, as a both digital services company and as one Hitachi conglomerate, is uniquely positioned to take advantage of these transformations happening across the market-driven by AI enablement and AI-led transformations. First off, if you look at us, we are uniquely positioned in our domain expertise in the industries we currently operate in, which is energy, mobility, and Connective Industries. But also industries we serve across the world in the mission-critical areas of telecom, automotive, banking, financial services, and healthcare life sciences. In these industries, we have unique advantage of strengths in domain and understanding of domains to create FDE teams that work with our top clients to leverage capabilities that we've built with HMAX as our framework for data fabric and creating ontologies for these customers and these industries. Most importantly, leveraging our ecosystems of partners and capabilities to deliver transformation services across every layer, from the infra layer to the data layer, to the agentic applications layer, and then of course, the business process transformations layer. If you go to the next slide. We believe we are uniquely positioned at Hitachi Digital, both in terms of what we've been building as capabilities globally with GlobalLogic as a digital engineering, product engineering services company, and Hitachi Digital Services, which has strong cloud operations, IoT, and platforms capabilities across the world. Bringing these two capabilities together has allowed us to create transformation both within our own front business units. If you see, we've grown 46% year-on-year delivering these synergies and transformations across our FBUs. But also creating opportunities to serve the seven verticals that we focus on, that I've talked about. Mission-critical industries that are critical to societies and the world across the world. Second is really creating four growth service lines. We believe cloud and CloudOps, data and insights, enterprise platforms and agentic platforms, and last but not the least, IoT, that is an enabler for physical AI, are capabilities that are uniquely positioned for us. We're bringing the convergence of these capabilities along with the vertical focus areas to transform our top 200 customers, which have grown in single digits the last few years. But we've seen the opportunity to really take part in vendor consolidation across these customers because they trust our brand, they trust our capabilities, and they see unique end-to-end capabilities that we drive along with domain expertise in these customers. Last but not the least, we've been investing steadily over the years in our IPs, which are both domain-focused in the seven industries that we focus on, and also enabling ontologies for these industries to really enable and leverage AI for their business process transformation. One of the things that we are doing, and going to the next slide, we're excited today to also announce a new name that brings our services businesses, namely GlobalLogic and Hitachi Digital Services, together. The new name is Hitachi Digital. Starting tomorrow, you'll see brand campaigns that define Hitachi Digital, if you go to the next slide. Our brand theme around Hitachi Digital, which we proudly are sharing here with you all today, which is Engineer What the World Depends On. As you all know, we cater to mission-critical industries that societies depend on, and we've been delivering both the physical layer and digital layer transformations in these industries. We will continue to do that, enabling these industries to take full value and full potential of AI in the coming years. If you go to the next slide. You are going to see a lot of the brand purpose and brand transformation across our services businesses globally. But really the focus is on being a services company that helps complex industries leverage data, AI, and physical technologies and IoT technologies converge and sustainably build business transformation in these industries as we cater to these customers across the world. If you go to the next slide. One of the things that we really are trying to hence simplify for our employees, for our customers, and for our partners is what is our growth strategy. We actually break it down into three areas. One is our core, which is our strength in the chosen verticals and the industries we serve, as well as the industries we operate in. Second is the AI era, and the service line transformation that we are doing with focus on service lines that are enabling AI adoption, namely data and insights, IoT and physical AI, enterprise platforms and agentic platforms, and lastly, cloud and CloudOps, including FinOps and TokenOps. The multipliers for us include our IP-led differentiation, so that we non-linearize how we serve our customers and help them build ontologies that help them build the foundations for AI transformation. Secondly, we will continue to look at inorganic transformation and inorganic acquisitions. We've been successfully looking at inorganics and acquired capabilities across the world over the last few years. But I think we are now even more poised well because of the integrated organization, because of the leadership structure we've created, and because of the customer access and market access we have to participate in consolidation and acquiring capabilities in verticals, in geographies, and in horizontals that we've identified as our focus areas. Last but not the least, the amplifiers, which is one Hitachi as a company that has access and understanding of deep domains and operating companies across energy, mobility, and Connective Industries. Also uniquely poised with our ecosystem partners, which include hyperscalers, data scalers, model scalers, and SaaS and platform scalers. I want to talk a little bit about these partners, if you go to the next slide. We are not just uniquely positioned here as partners that we leverage to create unique solutions for our customers. With a lot of these partners, as Hitachi conglomerate, we are large consumers of their technology. We are customers, and we create 360 relationships with each of these partners, and that's what makes us uniquely poised. Also the domain expertise we bring to these partners, along with our FDEs, to take their technologies and really enable them to create true value and ROI with AI into the customer base that they want to serve and we jointly serve together. Lastly, if you go to the next slide. We just want to share some of the work we've been doing over the last few years and what differentiates us. We talked about industries we serve. Walgreens is one of America's largest pharmacies and continues to grow as a really consumer-focused, customer-focused, unique pharmacy across the country. For the last many years, we've been a digital transformation partner, and now a data and AI transformation partner that is leveraging technologies to transform Walgreens' pharmacy platforms, their supply chain, their last-mile filling platforms, as well as how they engage with their customers and price for their customers across their stores across the country, as well as their digital stores that they serve for North America. Hitachi High-Tech has been working with semiconductor companies in leveraging data and cloud to help them optimize their MES systems, their PLM systems, as well as creating the last-mile advantage in quality and transformation to optimize semiconductor equipment manufacturing and really creating higher productivity across the industries that they serve. Hitachi Rail is a large customer, and it represents all the mobility and automotive customers we work with. Again, for those customers, we are transforming how they manufacture, how they repair, how they do predictive maintenance, how they actually do last-mile servicing of their customers, and pricing of the customers. Last but not the least, Hitachi Energy, which represents the energy sector that we serve across the world, where there's massive transformation happening, everything from transmission to distribution, to pricing, to load management using data cloud and AI, along with our ecosystems partners. This is just representative of some of the customers we serve, and we continue to serve in the industries that we chose as the seven focus industries. We really, again, want to reiterate, we are uniquely positioned in the global marketplace as we bring GlobalLogic and HDS together into Hitachi Digital to serve seven mission-critical verticals, 200 of our top clients and continue to serve other clients across the world using four service lines that are really driving growth to enable AI adoption, true adoption with ROI in our customer base, and leveraging our ecosystem partners to deliver their technology with value creation in these industries. I will take questions, and we'll pause at this point and hand it over back to you. Thank you.
Operator: Kato-san, Anand-san, thank you very much. At this moment, we would like to move to questions and answers. We will take questions for earnings as well as overseas IT business. Those of you with questions, please press the hand raise button on Zoom's screen. We will call your name. Once your name is called, please unmute, state your name and affiliation before asking questions. Time is limited, therefore, we would like to limit the number of questions per person to a maximum of two. We will take questions from those of you on the Japanese channel. Members of the press, institutional investors, and analysts. We'll be taking questions from all of you. Anyone with questions, please press the raise hand button. Harada-san, please unmute. Please ask your questions in Japanese. Harada from Goldman Sachs Securities, thank you very much. The number of questions is limited to two.
Ryo Harada: My first question has to do with DSS. As was presented, JPY 9 billion one-off factor, had it not been there, the margin increased more than Q1. JPY 9 billion one-off factors, specifically, what were they? Could something similar happen in the future? That is what I would like to ask for. On page 12, on a full year basis, the forecast, the margin without one-off factors is 18% or so. It seems that full year forecast seems a little weak given the momentum right now. Are you being conservative? You are leveraging AI to increase efficiency of development. Is that the case? If you could also answer that. That is my first question.
Tomomi Kato: Yes. Allow me to answer. One-off factors, as I explained, in one project, a loss cost overrun happened, unfortunately. It is in the area of SI, that is social infrastructure business. Having said so, we know what the outlook is going to be. In Q2, because of the loss cost, I think the project will wind down, and I do not think there will be any further effect from that going forward. Regarding the margin, in the first half, excluding this 17.2% on a full year basis. You suggested that perhaps our forecast is rather conservative, but this is because it depends on the mix of projects. Rather than being conservative, we are looking at the projects as we do so. The first half number is as presented, as well as the full year forecast. We are being neutral in that. This is testament to our capabilities, so we will continue to work toward improvement. Thank you very much. Just to follow up, regarding AI utilization, you will use AI to improve margin as well as productivity. In Japan, I think there is a quite robust demand for that. Perhaps projects that you have not been able to capture, you may be able to capture going forward. That is a possibility. Next fiscal year, two years from now, when will we start to see the impact? If you could please follow up on your answer. As I have already explained, as of end of last fiscal year, SI business has realized 10% productivity enhancement, and FY 2027 goal is set at 30%. This fiscal year, at the end of fiscal year, 20% productivity enhancement is what we are looking for. I think we will start to see the impact of that on our margin gradually.
Ryo Harada: Thank you very much. My second question, and this is a question to Anand-san. GlobalLogic and Hitachi Digital Services were merged, and additionally, what is it that you will be able to do as a result of the merger? On page 11, you talked about the track record so far. Additionally, what is being enabled as a result of the merger? In terms of digital services, AI-enabled cyberattacks are happening. Customers are discouraged to connect to the network. That is negative. AI could also, however, be used positively to enhance security. What is Hitachi's position on that, and what kind of commercial business opportunities do you see?
Anand Birje: All three great questions, by the way. There are three questions within your one question. First off, I think in terms of what this merger brings together, let's start with capabilities. If you look at GlobalLogic, the strength and capabilities of GlobalLogic over the years has been strong product platforms and application engineering, which is very critical, which is where the process and business process of every industry lies is at the application layer and the data layer. So product engineering, platform engineering, and data engineering were strengths and are strengths of GlobalLogic. Hitachi Digital Services, on the other hand, has always built capabilities around enterprise platforms and agentic platforms such as ServiceNow and Salesforce and SAP & Oracle, as well as IoT platforms around MES, PLM, SCM, and CloudOps, FinOps, and now TokenOps. As we combine these two organizations, we are now able to offer to our customers everything from engineering and build to transform and operate, which is really what customers are looking for as they consolidate their vendors and are able to work across the layers from the infrastructure layer to the data layer, to the API layer, to the applications layer with fewer vendors who have end-to-end capabilities. So the capability as we bring together the two organizations is a big advantage to customers. Secondly, both organizations have customers who really like those capabilities, have long been loyal customers, and have worked with both organizations for a period of time, but they have not worked with each other's organizations. So cross-pollination and really cross-selling into these customers' capabilities of each of these companies is a huge opportunity for us ahead. Vendor consolidation is happening in the market, and given our size and the trust customers have in the Hitachi brand, is something that we are leveraging a lot in driving the vendor consolidation. Third is between the two organizations, we have strong, deep domain expertise in different industry verticals. As we focused on seven industry verticals that I talked about earlier, we're able to bring the best of domain capabilities in addition to the horizontal capabilities of both organizations together. Last but not the least, I think the fact that these organizations are now operating as one single company with a single CEO, which is myself, a single CTO, a single CMO, and the entire executive leadership that is one operating model, it makes it easier for customers, partners, our ecosystem analysts and advisors, and industry at large, including our own employees, to see us as a single, large global technology services and digital services provider and work with us in a much more seamless manner. So that is the third big advantage. I think your question on AI and the risk is absolutely right. I think last three years, what we really, really believe has been a lot of hype around AI, right? A lot of POCs created, a lot of interesting opportunities explored. But as we look at the next five years, enterprises are looking for more realistic adoption, and it starts with understanding the risk of security, risk of governance, risk of overrun of costs, and most enterprises are not ready for it. That is something that we bring as a large enterprise ourselves, working across three mission-critical industry sectors, energy, mobility, and Connective Industries. We are doing AI adoption in our own companies, and doing that at scale in extremely regulated industries has allowed us to build IP frameworks that help us build harnesses AI agent registries, security protocols, both at the OT layer and the IT layer, because again, we work both at the physical and digital AI layers. Then last but not the least, bringing governance around how our engineers build for each of the domains and solve for each of the domains using AI data and cloud foundations. I think, again, just having that own expertise is what has helped us become valuable to our clients. So great questions.
Tomomi Kato: With respect to cybersecurity, because this also concerns Japan, just to add, within DSS, there is a cyber COE rather, and this is playing a role in defending against cyber attacks, and we are exploring the risks. We are also helping customers defend themselves. So centering around the COE vis-à-vis customers, we are coming up with ways to help them defend themselves. From customers who are responsible for critical infrastructure, we are seeing increasing number of inquiries for security. Hitachi work with customer FDE and cybersecurity COE. Both of them are going to work together to provide solutions to customers' problems. Our strength is representing Anthropic, for example. So utilizing frontier technology, we are able to provide technology, including that of Anthropic, and we have OT internally, so inclusive of OT customer zero as well as physical security. We are in a position to provide all of that.
Ryo Harada: Understood. Thank you very much.
Operator: Takizawa-san, please, over to you. Please unmute and ask your question in Japanese.
Speaker 5: Thank you very much. Question. Regarding HMAX, in terms of the target has gone up YoY 70%, there is a significant growth that is expected in HMAX. Is it the recategorization of existing service or is it net increase or net acquisition? Can you give me a breakdown between the two? Furthermore, in terms of the net increase, 22% adjusted EBITA, is it high adjusted EBITA in a similar way? What should be our understanding?
Tomomi Kato: Hatakeyama-san, please respond.
Masashi Hatakeyama: Thank you very much for the question. Regarding HMAX, this time, compared to the Lumada definition so far, we have a more detailed definition. HMAX definition is given in the appendix. Digitalized asset, the data utilization, and AI enabler is strengthened as domain and recurring digital service. These are three that have been identified, and there might have been some that were satisfying this, but we have reclassified according to the definition and are posting revenues for HMAX. In order to make this HMAX, the conditions must be met, and that has been reflected accordingly. Please consider that most of this will be new business.
Speaker 5: Thank you very much. Regarding energy, on the other hand, in this result as well as the five-year plan, in both contexts, I would like to ask the following question. In terms of the midterm energy, the supply capabilities are increasing by 2.5 times. These are growth rates that are explainable. Price increase more than inflation seem not to be reflected. What about the recent past profitability? 2.6 point improvement has been made in terms of profitability. Is margin going to be pushed up because of the price of orders? Is it more than the inflation increase? Please talk about the recent past.
Masashi Hatakeyama: In this case, for energy, in terms of revenues, we have not made up with the revision. We have changed the profit level. At the time of July, we had a revision, but the revenue level was being forecast at the very last minute before the announcement. Therefore, taking into consideration the production capability, we believe that this is the level we can achieve. Why has the margin increased is the question. Productivity increase is the driver. Productivity increase means that different processes must be smooth and improvement has been made. From one year ago, ERP utilization has gone up and inclusive of AI utilization, this is contributing to productivity increase. Furthermore, for major project that we are working in, there is cost potential that we have to be aware of. A contingency must always be factored in. So far, this is working well. Loss cost was not as high as expected originally, and that is the reason why the profitability has increased. Furthermore, it is not related to the upward revision, but in terms of a long-term trend, I would say that the price is still continuing to improve. For the backlog, we are looking at the gross margin, and there is no change in the trend. I believe that there is room for further improvement. The upward revision that we have made has been factored in the first quarter. Productivity increase is the driver for the profit margin increase.
Speaker 5: Thank you very much.
Operator: Next, Hirakawa-san. Hirakawa-san, please unmute and ask your questions in Japanese, please.
Speaker 6: Hirakawa speaking. I have two questions. Question number one is directed to Anand-san. Once again, why did you join Hitachi? Why did you decide to work for Hitachi? You worked for Emerson as part of your career, industrial company, or Encora, digital companies, and so forth. But what kind of experience that you've had will continue to Hitachi Digital's success? Is there affinity, if I may ask? That is my first question.
Anand Birje: Again, a great question. You are right. If you look at my career, it actually spans across two very distinct industries, where Hitachi is uniquely poised in the DSS or Hitachi Digital Business. I started my career in industrial control systems with Emerson Electric, both at the physical IoT layer, the Emerson's distributed control systems business, and then at the MES and MMI layer with their SCADA business, which was Intellution. Then for the last 20 years, actually more than 20 years, I have been involved in large global systems integration, digital engineering, data engineering, and application services businesses across HCL Technologies for almost 20 years, building two big businesses within HCL. Then more recently, Encora, which was a direct competitor to GlobalLogic, headquartered in Santa Clara, doing digital engineering, data engineering services across industry verticals. As I looked at my career forward, I really found Hitachi to be uniquely positioned that brings both of these capabilities. Very few, really, if any, companies across the world can really combine these capabilities that are going to be important in what I call the phygital enterprise transformation, the physical layer and the digital layer transformation. Very few companies can do phygital, both layers of transformation, in especially complex regulated enterprise industries. So again, sitting in Silicon Valley for the last 30 years and working across enterprises across the world in transforming and building digital services, I felt this critical phase of my career, I really needed an enterprise and a company of the size and scale, which has the ability to invest in AI, in data, and digital transformation and physical transformation, and partner with some of the best companies in the world. That is what brought me to Hitachi. I think the experiences from my last 30 years between the two industries is what I bring in the convergence of phygital for Hitachi. Of course, additionally, just the industry networks and people who have worked with me across these industries and these companies are excited about Hitachi and our way forward, and that is what is represented in the new leadership we are building together. Thank you very much.
Speaker 6: Thank you very much. Second is about engineering service. On a year-over-year, this year's target is 6% increase year-over-year. I think it is rather normal, not too high, but revenue is an increase of 3% year-over-year. So revenue increase in engineering service is rather low. That is because strategic withdrawal from the business of focus. Is that how you are going to explain it? Within Hitachi Digital Services' revenue, so non-focus business. Correction, non-focus business. What is the percentage of that as a total? Will this withdrawal from non-focus business end this year, or will it continue into the next year and onward? What is the timeline? That is my second question.
Tomomi Kato: I will answer the first part of question two, and for the latter part, I would like to turn to Anand for an answer. In engineering service, year-over-year, revenue growth of 3% is set. That is because Hitachi Digital, which is former GlobalLogic and HDS combined. HDS itself was growing revenue quite successfully in manufacturing sector and synergies with other Hitachi companies. Regarding GlobalLogic, as was explained today, strategically, narrowing down on verticals, that is what Anand has started to do. Because of that, Our revenue target is set at this level. On this fiscal year, we will pursue various structural reforms. That is Anand's policy. As to the future outlook, I would like to invite Anand to comment on that. What is the timeline as well?
Anand Birje: Thank you, Kato-san. As Kato-san rightly suggested, we really look at this year as a year of reset and accelerate. We believe that if you look at the next five years, being very intentional about the verticals we want to focus on, the intentional to focus on horizontals where we see growth acceleration. I talked about data and intelligence, I talked about cloud, FinOps and ops. I talked about IoT and physical AI, and of course, enterprise platforms for agentic modernization. This is where we are seeing growth acceleration across both our customers and competitors' customers who are attracted to consolidate and looking at us as an end-to-end physical and digital AI services company. Lastly, is intentionality in the geographies and the customers we focus on, which is really the 200 top customers that contribute today to about 80% of our revenues. We see a lot of growth opportunity because if you look at that base of customers, we have only grown single digits last year to this year. As consolidation happens based on capabilities of vendors and our now combined end-to-end capabilities, we see higher double-digit growth opportunities in the coming years. Really, this is a reset year for accelerate with intentionality around seven verticals, four horizontals, 200 top customers, and 11 ecosystem partners. I am not going to project out numbers for the next year, but I am very bullish at the market opportunity ahead. I can also say that very few companies can play at both the physical and digital layer across the world at scale, especially in mission-critical industries. That is really what is giving us the confidence of the year ahead.
Operator: Thank you very much. Next to Inajima-san, please. Inajima-san, please. Please unmute and ask your question in Japanese.
Speaker 7: I hope you can hear me. Question, thank you very much. I have also two questions. First question is regarding the profit revision is mainly Hitachi Energy and data center orders received increased is significant. I have a question about that. Regarding AI infrastructure, is there some credit concerns that is occurring regarding your data center projects? Is this main cancellations or reducing in scale? Are there any concerns about the data center business going forward? That is my first question.
Tomomi Kato: First of all, regarding data center, in terms of Hitachi Energy, it is about a little bit more than 10% in terms of revenues. Backlog is increasing, orders are increasing around 10%+ level, and therefore it is growing. The ratio is, as I have already mentioned. Now, in particular, for the orders that we are receiving, there is no delay. Tamai-san, would you like to address this?
Shinichiro Tamai: Regarding data center related business, for the projects that we are running today, there have been no delays. In terms of orders, the second quarter contribution was very significant, as we mentioned. There is a time lag before it is reflected in a revenue increase. The orders received this term to contribute in terms of revenue next fiscal year. So far, we are not seeing any delays or any payment issues.
Speaker 7: Thank you very much. I have another question. For January, Mr. Kato, CFO, talked about the regulations for China. There have been some delays, but the impact has been limited. This proceeding and this interim, I believe that the supply to Japan is becoming more difficult. You said that the impact is limited. Is it still the case? What are the elements or products that are most significantly impacted? What is the inventory level? How much production can you maintain given the current inventory level?
Tomomi Kato: To your point, as I have already explained in the past, CI mobility, rare earth, magnets, motors are being procured. There have been some variation in terms of delivery time and in terms of procurement partner as well as strategic inventory and alternative sources are being considered. Currently, the impact is limited. However, going forward We do not know what is going to happen regarding strategic inventory. We are going to watch this very carefully. Regarding what are being impacted, this would be a breakdown of our operation. Therefore, we will refrain from giving you details on the elements.
Speaker 7: Thank you very much.
Operator: We will switch over to the English channel to take questions from those of you on the English channel. If you have a question, please press the hand raise button. Any questions, please? If not, we will go back to the Japanese channel to take questions there. Yasui-san, please unmute and ask your questions in Japanese, please.
Kenji Yasui: Yasui from UBS Securities. Thank you. My first question has to do with power grids. Following Q1, in Q2, you made upward revision. On a full year basis, I think your profit is increasing by JPY 200 billion. Will this trend continue into the next year? Rather, JPY 200 billion increase in revenue. I would hope that that is the case into the next fiscal year, but the number is very large. Will the top line increase in its growth? Will growth accelerate? Is there any downside risk that you are concerned about? If you could please talk on that. Second, about cybersecurity. I do understand that it is very difficult to quantify, but I am led to believe that projects in this area will increase in one year in terms of the budget in the second half of this fiscal year. Perhaps projects in this area may start to increase. What is the level of increase from your perspective? In which verticals or sectors would that be? Financial services? At this moment, if you can share any numbers on that, I would appreciate.
Tomomi Kato: Thank you very much for the questions. Regarding the power grids, as you rightly pointed out, given the size of upward revision, and given the profit, yes, it is growing at this profit level. Up until last year, we said that it will continue to grow until 2030. In the last few months, we are saying that it will continue to grow into 2034. Since the volume itself will be larger, I think the growth will probably slow down. This year and next year, what is going to happen? Next fiscal year, what is going to be the accurate revenue forecast, we have not been able to identify yet. Given the overall trend, the growth rate itself will probably gradually start to decline. In terms of the amount, in the last two to three years, we have made a considerable CapEx, and that impact will start to show gradually. That is where we are right now. In terms of the amount, I do not think the growth will go down all that much, and that is our expectation. That is how we look at the outlook. Regarding cybersecurity, your second question. Since before, regarding cybersecurity, we are getting requests and requests for consultations from customers. This is a job for us to help customers defend themselves. It is increasing. At this moment, in terms of numbers, which area is increasing, what is the size, we are not yet ready to share numbers. Tamai-san, if you could add.
Shinichiro Tamai: Customers who are responsible for critical infrastructure. We are doing business with increasing numbers of such customers. Power, traffic, manufacturing, and so forth. These mission critical customers in mission critical industries that support society, we are increasingly dealing with such customers. But at this moment, we don't have any numbers that we can share with you.
Kenji Yasui: A follow-up question. Regarding power grid, if there's any downside risk, what would that be? Regarding cybersecurity, 30 minutes ago, NEC announced earnings, and they said that they're not changing the budget in Q3. Just 1 or 2 percentage points, or could it be 10%? Which are you close to toward next year? If you could give us a feel as to what the size of growth is going to be.
Tomomi Kato: Yes. Regarding power grid, downside risk, geopolitically and AI as well as cyber, there are so many potential risks that balance. There's a possibility of fluctuation or change. But what we think our strength is, Hitachi's operation is that development site as well as production sites, they are distributed across different geographies. I think we have quite strong resilience in that regard. But we have very large projects, and so there are always risks of cost overruns and delayed timelines. We have to conduct project management and risk management over such projects. Regarding the impact of cyber Would growth of over 10% happen right away? It's hard to conceive so, but in the world, so many things happen that are unexpected. We would like to continue to closely monitor. That's where we are right now. Thank you. We have gone beyond the allocated time, but we will take one more question before we close. Hosoda-san, please. Please unmute and ask your question in Japanese.
Speaker 10: Question. I have two questions regarding your energy business. Currently, production level has been increased and as a result, Hitachi Energy revenues as well as backlog, I think it's increasing by 2.5 times or 3 times. I think that has been presented. What about the delivery? Is it flat or is it becoming shorter? Please talk about the relevant timing. Furthermore, you said that there was a downside risk, which is geopolitical. For the long delivery time projects, inflation cost increase, can you reflect that on the price? Can you increase the price compared to the time that you received the orders? Can you increase the price thereafter?
Tomomi Kato: First of all, regarding delivery, we have been increasing our production level in a planned manner, and the productivity is increasing. We want to deliver as quickly as possible. But on the other hand, in terms of orders received, it's very significant. It's still growing. Backlog is increasing, and it is likely to continue going forward. Therefore, delivery cannot be shortened dramatically. That would be difficult to do. But delivery time to be reduced is very important, but on the part of customers, they have individual requests for delivery, and timely delivery is what we are focused on. In fact, we are making intensified efforts and improvements are being made. Therefore, in this way, we are trying to enhance the customer satisfaction level. For the moment, in terms of variation risk, inflation will have a one-off impact, but when we have a long-term contract, that is an important risk that we consider. Therefore, we use indexing, and if prices increase, to be passing through to price in an objective manner has been incorporated into the contract. Otherwise, we cannot accept a long-term contract. This is how we are dealing with this matter, and therefore, I think we are doing a good job managing the process.
Speaker 10: Thank you very much.
Operator: Thank you very much. With this, we would like to bring the second quarter FY 2026 earnings webcast conference to a close. Thank you very much for your participation today. Thank you.